Refinery closures hurt Europe's energy security

Some of Europe's largest economies face a growing risk of fuel-supply disruptions, as issues that drove many of the region's refineries out of business are set to intensify.

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By SARAH KENT and CASSIE WERBER

LONDON -- Some of Europe's largest economies face a growing
risk of fuel-supply disruptions, as commercial problems that
have already driven a swath of the region's oil refineries out
of business look set to intensify.

The vulnerability of the sector has drawn the attention of
policy makers across the continent,
with fuel security becoming a rising topic in the policy agendas of many governments
and regulators. They are concerned that the need to import more
fuel will mean higher prices at the pump for consumers who are
already contending with a weak economy.

"If this trend continues, probably the European Commission
will have to take it into account," said Pedro Miras, chairman
of Spain's emergency oil stockholding agency, Cores, and chair
of the International Energy Agency's standing committee on oil
emergency questions. The closures "could affect security of
supply, not today, but in the long term," he said.

Europe's aging
refineries have struggled to adjust to the lower demand and
weaker profit margins that accompanied the economic slowdown.
They have also been hit by increased competition from newer
refineries in the Middle East and Asia, which benefit from
lower operating costs.

Fifteen European refineries have shut down
since 2008, idling 8% of the region's fuel-processing capacity,
while many others are running at reduced capacity. The result
is that, even as Europe's total oil consumption has fallen, the
proportion of its refined oil products that are imported has
risen to 28% in the first quarter of this year from 20% in
2007, according to data from the IEA.

Now, the IEA is warning that a flood of fuel production from
new plants in Asia and the Middle East could push global
crude-oil processing to an all-time high of 77 million bpd in
the third quarter, squeezing profit margins tighter and
potentially leading to more closures.

"This could be particularly dangerous, if Europe would
become entirely reliant on imports, and no longer able to
support its own consumption needs," said Massimo Vacca, a
spokesman for Saras SpA, which runs a 300,000-bpd refinery in Sardinia.

Italy's refiners face a "dire" situation, said Alessandro
Gilotti, the president of the country's oil association, Unione
Petrolifera, at its annual meeting in Rome last week. "A couple
of [Italian] refiners could be closed in the next year or two
with the possibility of one shutting down already in 2013."

The problem has taken on particular urgency in the UK since
the sudden closure last year of the 220,000-bpd Coryton
refinery near London, following the bankruptcy of its owner,
Petroplus.

"The Coryton closure really stuck out in people's minds as a
serious canary in the coal mine," said Alan Whitehead, a UK
lawmaker in the opposition Labour Party and a member of the
House of Commons Energy and Climate Change Committee. Coryton
was one of the largest and most modern facilities in Europe and supplied 10% of the UK's
fuel.

The UK has seen its tally of refineries fall to seven from
18 in the late 1970s. In the wake of the Coryton shutdown, the
country's Department of Energy and Climate Change is reviewing
the role of the refining industry in energy security
and the way the country's emergency oil stocks are held.

"Security of energy supply is one of our principal policies
at the Department of Energy," UK Energy Minister Michael Fallon
told a parliamentary hearing Tuesday, when asked whether the
loss of refining capacity could be a danger for the UK.
"There's no complacency about this issue -- it's something we
need to weigh very carefully," Mr. Fallon said, although he
didn't see a risk of imminent supply shortages.

Other countries have had similar experiences. According to
data provided by BP, the biggest loss in refining capacity between 2008 and
2012 was suffered by France, which lost 25%. Germany's has
declined 12% in the same period, compared with 11% in the UK
and 8% in Italy.

This has
happened in many cases despite the best efforts of European
governments. The Petit-Couronne refinery in France languished on the
market for 15 months as the government struggled to broker a
deal to save the business. Plans for a sale eventually fell
through after the final two potential buyers were deemed by a
French court to have insufficient funding.

The UK government was keen for a buyer for Coryton to be
found, but ultimately was unwilling to provide the financial
aid required to keep the plant running.

"All of Europe is for sale, but nobody wants to buy it,"
said a senior executive from the oil marketing and refining
industry who didn't wish to be named.

Further refinery closures would make Europe
even more vulnerable to disruption if "foreign producers will
privilege their internal consumption needs, versus the
continuity of exports, especially at times when they have
spikes of internal demand," said Mr. Vacca, the Saras
spokesman.

Higher imports could also cause prices to rise at the pump
due to increased transport and storage costs, the IEA said.

But government intervention to save Europe's refining industry is a tough sell in
a region suffering both a stagnant economy and sharp public
spending cuts. An additional investment of $21 billion on
improvements and upgrades is needed by 2020 just to keep
refiners in business, according to a report published by the European Commission in May.

Dow Jones Newswires

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